The potential acquisition of Kazkommertsbank by Halyk has stirred the banking market of Kazakhstan. The merger of two heavyweights could form a megabank—not by global standards, but certainly within the local market. We are yet to understand the nature of this deal. It is possible that even the shareholders of these financial institutions are unaware of it. The question remains open as to whether this deal will even occur, as negotiations are currently based on non-obligatory memorandums. Nonetheless, the market is already actively preparing for possible developments.
The potential transaction may have prompted the recent announcement of a significant share purchase of Bank CentrCredit by Tsesnabank. Banks Tengri and Capital have also announced plans to merge. Market experts, in a discussion with Forbes.kz, believe that this is far from the limit—Kazakhstan's banks are expected to experience a wave of mergers and acquisitions.
The Kazakhstan banking market struggles with old problems that have remained unresolved for years, stemming from the major banking crisis of 2007-2009. The foremost issue is that of bad loans, which remains largely unsolved. The National Bank has imposed strict requirements on the level of bad loans, thereby creating conditions for mergers and acquisitions in Kazakhstan's banking system long ago.
Still, banks may stand on their own if shareholders inject capital. Some will undoubtedly do this. But many bank owners are unwilling to spend billions, which is understandable. It is far easier to increase capital by reducing expenses, which can be achieved through mergers. To phrase it differently: think of two hypothetical banks as two trucks, each needing to transport a small load. It is illogical to run two vehicles when the cargo can be consolidated into one. Similarly, banks can merge, jointly reduce staff and operational costs, and increase capital to withstand the market.
At the same time, following the potential merger of Kazkommertsbank and Halyk, the market will see the emergence of a financial organization controlling about one-third of the country's banking system. Against this backdrop, many other banks will appear diminutive. To effectively compete with this giant, they have no choice but to merge. This may, incidentally, lead to massive job cuts in banking staff.
Also, one must not forget Kazakhstan's membership in the WTO and EAEU. These organizations open up our market, and Kazakhstan's banks may not withstand the competition unless they grow large and strong enough. Now, during a crisis, the Kazakhstan market might not appeal to foreigners, but prosperous times will come, foreign investors will arrive, followed by banks from abroad catering to them.
The Dictatorship of the Market
General Director of BRB Invest LLP Galym Khusainov notes that bank mergers are driven by the market. Problems in the banking sector are caused by various factors, including economic downturn, poor corporate governance, weak institutional environment, etc. In such a situation, some banks logically seek synergy to solve these issues.
- The time for mergers has come long ago, but deciding on them is not quick, as there will always be shareholders dissatisfied with the terms, - says the expert. - Unfortunately, mergers do not always occur on equal terms. The synergetic effect mainly involves reducing administrative and operational costs, which primarily affects the staff who will be laid off. But this is the market, and in the market, it is inevitable as only the best survive. This will improve the quality of the merged bank.
Galym Khusainov adds that the problem in the banking sector is not only the large number of banks, but most importantly, the lack of proper corporate governance in certain financial institutions.
- If mergers show that the government supports certain shareholders without assessing fair value and the real situation, it won't solve the problems. The best, not the closest, should remain, - the speaker emphasizes.
A Carte Blanche in the Era of Mergers
Chairman of the Board of JSC "Tsesna Capital" Samet Balkenov, responding to our edition's inquiries, states: if we look at the market shares of Kazakhstan's private banks, two trends stand out in terms of asset concentration.
On one hand, the market share of the largest banks is gradually decreasing. If 10-12 years ago, the "big three" accounted for about 70% of the sector's assets, today it is already about 47%. Therefore, after consolidating Halyk and Kazkommertsbank, if this occurs, their mathematical share will be no more than 39%, excluding their subsidiaries.
- In our view, the reason for the largest banks' declining market share is the faster growth of medium-sized banks compared to the "big three," one of which, in particular, recently joined the "big three" (Tsesnabank), - the interviewee states.
On the other hand, the share of players outside the top ten banks has always been insignificant, usually not exceeding 1-2%. Today it remains no more than 2% (among banks with Kazakhstani shareholders).
Drawing from the banking sector's development in not only developed countries but also Eastern Europe (and Kazakhstan is not unique in this regard), consolidation of the banking sector is inevitable. It is crucial for bank leaders not in the top ten to have a clear vision and strategy for development. Otherwise, successful long-term existence will come into question amid the beginning consolidation among the country's large and largest banks, states Samet Balkenov.
He mentions changes in banking sector consolidation were bound to happen sooner or later. One reason is the relatively small size of the economy and population for 34 banks, currently operating. Because future growth of financial institutions requires investments in new technological products and services, smaller banks will struggle to compete technologically with larger players that can spread expenses over a larger client base. Hence, the principle of economies of scale increasingly applies to Kazakhstan's banking sector.
- Of course, there are exceptions to every rule. There are successful models of remote banking services globally, one example in Russia being Tinkoff Bank. Some smaller banks in Kazakhstan are already utilizing this successful bank's strategy elements. However, not all non-top 10 banks in Kazakhstan might choose or implement (since it's more challenging) such a strategy, - the expert deliberates.
According to Mr. Balkenov, it's too early to comment on the depth of changes post-bank merger. Based on Eastern Europe, we can predict probable scenarios. Banks not involved in mergers will have a brief window to become competitive. How they use this time will become apparent later. After full integration of merging banks, others will find it harder to compete against them. In our case, following consolidation of the two largest national banks, finding a competitive niche will become more pressing for medium and especially small banks.
- These small banks face two options for continued success. First, find a specialization and client niche that's hard for major banks to enter. Large banks may later acquire them to access these clients. Second, consider merging with other, small players to combat loss of market share and prospective profitability, - suggests Samet Balkenov.
The head of "Tsesna Capital" states layoffs and restructuring are inevitable in such processes. Bank employees need to be concerned and reflect on their future positions in the financial structure.
Nevertheless, he hopes mergers will eventually strengthen Kazakhstan's banking sector among EAEU countries, making it more competitive.
A Wise Decision
Chairman of the Board of Nurbank Eldar Sarsenov, responding to questions from Forbes.kz, explains: currently, the Kazakhstan market is quite overleveraged. It also doesn't grow at mid-2000s' rates.
- The current picture is that with 17-18 million people, we have 34 banks. It may seem adequate, but we've seen nearly zero economic growth years, leading to stagnant or declining real incomes. Contributing factors include declining oil prices and currency devaluation. If incomes don't rise but instead fall, where will they find money to repay loans? – questions Eldar Rashitovich. - This negatively impacts banks, which now face difficulties. Growth needs new drivers for citizens to borrow more, ensuring future credit portfolio growth, or reducing banks. Merging financial institutions is a wise decision because, unlike other businesses, they work with deposits and have a social responsibility. Merging can stabilize and strengthen the system.
The Nurbank head believes, firstly, banking system consolidation can help reduce NPL levels. Mergers reveal realities and allow acquiring banks to conduct due diligence to ascertain the true quality of acquired assets. Each buyer decides whether to acquire only good assets or both good and bad ones at a discount. Thus, a kind of "spring cleaning" occurs.
- Secondly, in Kazakhstan, Basel III and IFRS 9 requirements will regulate banks' capital calculation methods from 2018. Capital adequacy requirements will tighten. Therefore, consolidation should benefit the market overall. However, mergers must be conducted carefully to maintain trust in the banking sector. The sector will thus recover, enabling a fresh start in the national banking sector's life, - concludes Eldar Sarsenov optimistically.
An Outside View
What do abroad think of mergers and acquisitions? S&P Global Ratings forecasts banking sector consolidation in Kazakhstan over the next two years. Analysts believe shareholders will likely engage in mergers and acquisitions due to banks' weak internal capital generation capabilities and lack of funds for recapitalization, limiting solutions for asset quality deterioration, insufficient capital reserves, and IFRS 9 compliance.
S&P Global Ratings experts noted in their recent report: "If mergers and acquisitions occur without genuine 'balance sheet cleansing' (e.g., 'cleansing' continues to involve transferring non-performing loans to special legal entities owned by the same banks that issued these problematic loans, instead of selling them to third parties), the banking system's stability won't improve," they wrote.